172 AN INTRODUCTION TO ISLAMIC FINANCE
This risk of losing depositors raises a more serious exposure, termed
“displacement risk.” Displacement risk refers to a situation where, in order
to remain competitive, an IFI pays its investment depositors a rate of return
higher than what should be payable under the “actual” terms of the invest-
ment contract, by forgoing part or all of its equity - holders’ profi ts, which
may adversely affect its own capital. This is done to encourage its investment
account holders not to withdraw their funds. Through a geographical diver-
sifi cation of the deposit base, an IFI can reduce its exposure to displacement
or withdrawal risks. With the changing face of the banking business and the
introduction of Internet - based banking, achieving a high degree of geograph-
ical diversity on the liabilities side is conceivable and should be encouraged.
ENDNOTES
- Chapra and Khan (2001).
- The failure of Savings and Loans companies in the United States during the
1980s is a classic example of bank failures arising from assets - liabilities mis-
match. - See Creane et al. (2003).